Chartered Accountants

Tips on how to deal with the downturn 

We thought it would be a good idea to provide clients with a checklist of matters that a prudent owner should monitor closely when business starts to slow and a downturn looks likely.

Its been said that cash is king.  This is one of the most important factors to monitor in any downturn in business conditions.  A business cashflow budget is essential.  Failure to meet commitments when they are due to the bank, creditors or Inland Revenue is a warning sign that cannot be ignored.

Accounts Receivable (Debtors)
There is a possibility that there will be an increasing number of customers that fail to meet their accounts on due date.  Stricter credit policies and a willingness to work with customers may help to ensure that payments are received on time.  The stricter credit policies will prevent credit being given where it shouldn’t be.  Working with customers, perhaps offering discounts for a prompt payment and frequent follow up calls will help to ensure payments are received.

Accounts Payable (Creditors)
Suppliers to yourself will also be monitoring their accounts more closely.  They could withhold stock for sale or other materials  for manufacturing if their accounts are not met promptly.  This in turn will affect your cashflow because materials and services, which you need, may not be supplied on time if you don’t make payment to suppliers.

Trading Banks
During a period of downturn, banks are usually reluctant to increase lending.  Overdraft limits may be more strictly enforced.  Banks like to lend to money to people who don’t need it.

Stock on Hand (Inventory)
Control of inventory and checks on quality, price and deliveries need your constant attention.  Money spent on stock is locked up until the stock item is sold.  This means that it’s a good idea to sell slow moving or dated stock even at a discount so that the funds can be released into working capital.  Another factor could be the exchange rate.  Prudent buying and appropriate purchasing of currency can help to offset the lockup of monies in inventory.

One of the most important assets of any business is your staff.  A downturn in business can increase competition.  This puts further pressure on your existing staff to achieve customer satisfaction to gain return business.  Staff training can be a key ingredient in retaining staff.

It is very easy for expenses to blow out when the business is booming.  You only tend to look at costs, especially overhead costs  when the business suffers a downturn.  As conditions tighten it is important that expenses be managed carefully and you investigate better and cheaper means of doing business.

PAYE, GST, Fringe Benefit Tax and Income Taxes have to be met on the due date or penalties will be incurred.  Again adequate provision must be made for these taxes from your cashflow.  We have always recommended that clients open a tax reserve account and transfer funds across so that sufficient funds are on hand to meet these taxes.  They are no different from your rent or electricity bill.  They must be paid on time otherwise additional costs are incurred.

Business Planning
A cashflow budget and a business plan help to steer the business in the right direction.  They are key features of a successful business.  While everybody is affected by a downturn, those who plan and think about their business are more likely to get through the period in better shape.

Work Life Balance
When your business is perhaps facing a difficult period it’s most important that you be physically and mentally fit to stand up to the rigours of business.  It’s important that a lifestyle balance be achieved.  If you don’t make provision for wellness, then you will have to make provision for illness.

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